Considering an Acquisition?

Read this First.

If you’re in growth mode and are thinking about pursuing an acquisition, it’s important to clarify your primary motivation. This enables you to tailor your selection of an acquisition target and assess its viability as it relates to your short- and long-term goals.

Here are some of the top reasons agent owners seek an acquisition:

• Increased geographic footprint
• Experienced personnel (producers and staff)
• Expedited revenue growth
• Carrier diversification
• Operational expertise
• Efficiencies gained from economies of scale

The First Mid Bank & Trust Agency Finance team recommends that you consider several key factors before committing to an acquisition.

Agency Stage

One of the biggest considerations is whether you’d prefer to acquire a strong, growing agency or a declining, but viable group. While a growing agency is likely to cost more, it may be worth it if the agency is already operating efficiently. In addition, an established agency increases the likelihood that you’ll see a ROI sooner. If this is your first experience in acquiring another book, a thriving agency may be a good option.

Although you may pay less initially for a troubled or stagnant agency, you’ll need to invest more time and energy into helping it become financially stable and contributing to overall revenue. Someone who has successfully acquired other agencies and is familiar with the process is more likely to achieve success with this type of acquisition.

In addition to assessing the revenue side of the agency, it’s important to evaluate expenditures including salaries and benefits, rent or mortgage, marketing and other large dollar items. If the agency is operating at a low efficiency level with high overhead, you may be able to identify savings such as staffing or process changes — or you may decide that the challenges are more than you want to assume at this point.

Quality of Book

Before entering an acquisition, you may also want to consider the quality of the book to determine if it meets your objectives for the target. Are you looking for an agency that has many of the same carriers you do so you can build scale with each carrier? Or is there a key carrier relationship you don’t currently have that you could secure with the acquisition? Focus on retention rates, loss rates, E&O claims and the concentration of the agency’s current customers. Read more about this in Questions to Ask Your Seller.

Geographic Pros and Cons

The economy of the area where the agency is located can be a major deciding factor for determining if the target is a good fit for your goals. What industries and professions are dominant in the community? Is the area thriving or is it stagnant?

If the economy of the location is growing, you may want to keep the agency where it is. However, if the area seems to be stagnant it may be wise to fold that office into another one a few miles away. Drive-by and foot traffic for an insurance agency can sometimes play a part in its success, but in other markets, a virtual office may be effective in reducing overhead costs.

Customer Retention

Be sure to think through the transition risk with an acquisition. Will you, as the new owner, be able to retain the customers associated with the agency? Is retention dependent on key employees remaining with you after the acquisition? Insurance is a business of relationships, so it’s essential to explore the likelihood of continuing those customer connections during and after an acquisition.

Carriers and Contracts

Consider relationships with the carriers to confirm that existing carriers will consent to transferring the book after acquisition. Are there any new carriers that you need to contract with in order to transfer the full book? Will you be able to obtain those contracts? For those carriers that won’t contract with you, consider whether you carve that out of the acquisition or if you will be able to move those customers into new policies with existing carriers.

In order to achieve a successful acquisition, approach the exploration, vetting and acquisition process thoughtfully to ensure that the targets you are looking at will meet your goals and objectives. We’re here to support your agency’s growth, including acquisition loans for qualified borrowers.